Problem
Bolt Systems is facing financial distress, Bolt has a loan of $1.7 million due at the end of the year. Without a change in its strategy, the market value of its assets will be $1.5 M at that time. Bolt is considering a new project. The project requires $200,000 upfront investment; the project is going to generate a risk free cash flow of $300,000 in one year. Ignore time value of money considerations (or, you may assume that the appropriate discount rate is 10%) Would shareholders of Bolt be interested in investing in the project? Explain? Would debtholders of Bolt be interested in shareholders' investing in the project? Would debtholders be interested in investing in the project themselves? If the amount Bolt owed were only $ 1 M would the above conflict arise?